If you’ve been a resident of Central Pennsylvania for more than a few years, you’ve likely seen various live-work-play (LWP) communities – maybe you even live in one. What we’re talking about it mixed-use commercial and residential real estate where people have the opportunity to live, work and play (shop, dine, etc.) all in a relatively close distance to one another. A great example is the Walden community in Mechanicsburg, but there are many others that we will examine in this article.

To help us explore this growing trend, we turned to Chris LeBarton who is a Senior Market Analyst with CoStar Group. Chris covers commercial real estate data in Western Maryland, including the Baltimore metro area, up through Central Pennsylvania for CoStar’s Market Analytics platform.

Chris joins Mike Kushner of Omni Realty Group for a Q&A series where we specifically look at the growing demand for LWP communities in Central PA – and what this means for CRE professionals. Here is how Chris answers our most pressing questions.

Omni: When did the LWP trend begin and how has it grown?

Chris LeBarton: The earliest usage of LWP spaces I can find was in 2005. The trend really started to grow in popularity leading up to the market crash, but there’s no correlation between the two that I can see. The term “live-work-play” was very likely used prior to that, but I’m guessing the branding of mixed-use development really took off as concepts of ‘walkable urbanism’ and ‘Transit Oriented Development’ (TOD) exploded across the country.

According to the Urban Land Institute’s Mixed-Use Development Handbook, which was published in 2003, mixed-use development: provides three or more significant revenue-producing uses (such as retail/entertainment, office, residential, hotel, and/or civic/cultural/recreation); fosters integration, density, and compatibility of land uses, and; creates a walkable community with uninterrupted pedestrian connections.

Omni: Describe a LWP community in Central PA.

Chris LeBarton: First, let’s clarify what a LWP community really is, and what it is not. Some economic development entities and marketing types play pretty fast and loose with the term. An area can be a really nice place to live, work and play in, but if there’s over a mile or so between one element of the triad and the other two legs of the stool aren’t in the same building/development, it’s not really a LWP dynamic. Of course, the likelihood that most people who live in one of these communities also works in the same office/industrial park nearby is fairly low. But being able to do all three and be largely reliant on public transportation or your own two feet is really the spirit of the LWP concept.

Another key element to understand is that LWP is not at all relegated to a city environment. In fact, part of these projects’ collective appeal is that they can recreate a city environment without being in the hustle and bustle of a CBD. Specifically in Central Pennsylvania, there are a number of LWP developments. Here are just a few:

Lime Spring Square (Lancaster/Hempfield Township): A multi-phase, mixed-use campus being developed by Oaktree Development Group, the end result will include over 100,000 SF of retail, several hundred high-end apartments, and components of office, medical and industrial space. Penn State Health has a 76,000 SF medical office building there, while PDQ Industries is expanding operations into an 80,000 SF building.

North Cornwall Commons (Lebanon/North Cornwall Township): Another phased project that has been delayed off and on since being proposed in 2004, North Cornwall Commons is finally seeing movement at what would be the largest mixed-use development in Lebanon County history. A retail strip center with at least one confirmed tenant (a local coffee business) is underway at 148-acre site that includes plans for roughly 165 townhomes, office space and a hotel.

The 1500 Condominium (Harrisburg): An example of how you don’t have to have everything in one place, 1500 has 43 units (mostly rentals) that sit over top of two restaurants and is within walking distance to the Broad Street Market and several small-to-medium sized employers.

Chris LeBarton: As with anything that deals with where people live, shop/eat or work, I think the answer is “All of the Above.” We hear all too often about Millennials, or Boomers, or Downsizers, or Divorcees. Honestly, the more conversations I have with leasing agents and brokers the more I’m convinced the rule is diversity and the exception is homogeneity. Granted, most of these LWP sites cater to the more upscale or educated among society, but that doesn’t mean there can’t be families with two working blue collar parents who make a decent living and who want to save money on a car/parking and live close to work.

Omni: What advice could help commercial real estate professionals capitalize on the LWP trend?

Chris LeBarton: I don’t give investment advice, but here are a couple thoughts. First, find a way to make it authentic. Be it the retail mix, or a unique concept to the green space, or simply having the “town center” not look boiler plate, be conscientious of that buzz word “place making.” If you’re going to basically spend the majority of your waking life in a small area, it can’t be boring or cookie cutter.

Next, think ahead. What will you need to provide 3-5 years from now? Who would have thought that cities would be crawling with scooters?! Or even just electric vehicles. People looking to walk or be publicly transported or drive as little/cheaply as possible will likely demand options and flexibility. Things to consider are multiple charging stations, bike share platforms, car-share parking lots, etc.

Finally, identify fairly gentrified but not-yet-there locations that are retail/grocery deserts. LWP in the middle of a depressed community won’t work in many places (there are exceptions, of course). But cool/changing areas that are the next ‘it place’ often still need the food and fun to complete the shift.

Omni: Looking to the future, how do you predict LWP communities to evolve in Central PA?

Chris LeBarton: I think you can expect to see more of these types of projects turn up around dying malls or outlet centers that have to repurpose big blocks of space. Another interesting new trend that I could see taking off is the rise of co-living and co-working spaces in the same building.

The LWP trend stands to have a significant impact on Central PA’s commercial real estate market. Because LWP communities rejuvenate the local community, drive business and create employment opportunities, Central PA should be encouraged that so many of these communities are popping up across the region. Additionally this type of real estate appeals to a wide variety of demographics, making it a valuable investment opportunity for commercial real estate professionals. Looking to the future, LWP communities could be among the most powerful tools to breathe new life into struggling areas, and spur a burst of new economic activity that is greatly needed.

What are your thoughts on the growing demand for live-work-place communities in Central Pennsylvania? Is this type of community attractive to you? Why or why not?

Lancaster closes Q3 with the strongest market while Harrisburg West shows signs of distress.

The submarkets that make up Central Pennsylvania’s office real estate market each have unique advantages and disadvantages that really show through when you examine each individually. With the close of the third-quarter, we took a closer look at how the four main submarkets performed individually and comparatively.

The outcomes should surprise you! You may think you know which of the four submarkets outperformed the others, which one is most likely in distress and the others that are sitting pretty stagnant right now. But you’ll likely be shocked by the large variances in numbers, especially when compared to the historical averages and forecasted averages of what is yet to come.

Let’s take a closer look at some of the most interesting trends and numbers reported from CoStar’s Q3 2018 office report for Harrisburg East, Harrisburg West, Lancaster and York.

Harrisburg East

Vacancy – The vacancy rate for Q3 2018 in the Harrisburg East submarket is 6.4%. This is notably lower than the historical average of 7.8% and the forecast average shows this dipping lower to 5.7%. For comparison, the peak in vacancy rate occurred in Q4 2012 when it reached 10.8% and the trough was in Q4 1997 when it plummeted to 3.1%.

12 Month Net Absorption in SF – The twelve-month net absorption is 106,000 square-feet. While this is still lower than the historical average of 187,046 square-feet, the forecast average predicts the current net absorption will fall significantly to 61,648 square-feet. Though not by much, net absorption will at least remain in the black for now.

Rent Growth – The current 12 month rent growth is 2.0%. This is higher than the historical average of 1.4%, though the forecast average predicts that this will fall to 0.7%. For comparison, the peak in Harrisburg East’s rent growth occurred in Q1 2001 when it reached 8.3% and the trough was in Q4 2009 when it plummeted to -2.4%.

12 month deliveries in SF – Harrisburg East has a twelve-month delivery of 30,000 square-feet. This takes into account all of the deliveries that occurred over the last year; however no new buildings were delivered specifically in Q3 2018. Additionally, 20,000 square-feet of 4 and 5 star office space is under construction, which will be delivered in coming quarters.

Harrisburg West

Vacancy – The vacancy rate for Q3 2018 in the Harrisburg West submarket is 7.3%. This is slightly higher than the historical average of 7.0%; however, CoStar’s forecast average predicts this to dip to 5.6%. For comparison, the peak in vacancy rate occurred in Q2 2002 when it reached 9.8% and the trough was in Q4 1997 when it plummeted to 2.5%.

12 Month Net Absorption in SF – The twelve-month net absorption is negative 258,000 square-feet. The historical average is 95,454 square-feet and the forecast average predicts the market will again return to positive numbers with 25,193 square-feet. Q3 net absorption is not far from where it was in Q4 2014 when it was negative w 292,042 square-feet. Since then, it peaked in Q3 2016 at 611,057 square-feet before falling substantially to its current negative state.

Rent Growth – The current 12 month rent growth is 1.9%. This is higher than the historical average of 1.4%, though the forecast average predicts that this will fall to 0.6%. For comparison, the peak in Harrisburg West’s rent growth occurred in Q3 2000 when it reached 7.1% and the trough was in Q4 2009 when it plummeted to -2.8%.

12 month deliveries in SF – Harrisburg West has a twelve-month delivery of 40,000 square-feet, compared to the historical average of 127,660 square-feet. This takes into account all of the deliveries that occurred over the last year; however no new buildings were delivered specifically in Q3 2018. Additionally, 26,400 square-feet of 3 star office space is under construction, which will be delivered in coming quarters.

Lancaster

Vacancy – The vacancy rate for Q3 2018 in the Lancaster submarket is 3.6%. This is notably lower than the historical average of 6.8%; the forecast average predicts this remain fairly stable at 3.7%. For comparison, the peak in vacancy rate occurred in Q4 2004 when it reached 9.7%. The lowest the vacancy rate has ever been in Lancaster County is actually right now, in Q3 2018.

12 Month Net Absorption in SF – The twelve-month net absorption is 324,000 square-feet. The historical average is substantially lower than what it is currently and that is 109,103 square-feet. The forecast average predicts net absorption will decrease to 89,086 square-feet.

Rent Growth – The current 12 month rent growth is 4.9%. This is significantly higher than the historical average of 1.3%, though the forecast average predicts that this will fall to 1.6%. For comparison, the peak in Lancaster’s rent growth occurred in Q3 2000 when it reached 6.9% and the trough was in Q4 2009 when it plummeted to -5.0%.

12 month deliveries in SF – Lancaster has a twelve-month delivery of 12,000 square-feet, compared to the historical average of 114,237 square-feet. This takes into account all of the deliveries that occurred over the last year; however no new buildings were delivered specifically in Q3 2018. Additionally, 81,840 square-feet of 4 and 5 star office space is under construction, which will be delivered in coming quarters.

York

Vacancy – The vacancy rate for Q3 2018 in the York submarket is 5.3%. This is lower than the historical average of 6.9%; the forecast average predicts this remain fairly stable at 5.4%. For comparison, the peak in vacancy rate occurred in Q1 2008 when it reached 10.5%. The lowest the vacancy rate has ever been was 2.2% in Q4 1998.

12 Month Net Absorption in SF – The twelve-month net absorption is 29,500 square-feet. The historical average is 72,892 square-feet. The forecast average predicts net absorption will decrease to 8,847 square-feet.

Rent Growth – The current 12 month rent growth is 1.6%. This is fairly close in line with the historical average of 1.1%, though the forecast average predicts that this will fall to 0.6%. For comparison, the peak in York’s rent growth occurred in Q3 2000 when it reached 6.8% and the trough was in Q3 2009 when it plummeted to -4.3%.

12 month deliveries in SF – York has a twelve-month delivery of 0 square-feet, compared to the historical average of 80,056 square-feet. The forecast average predicts that this rise to 13,093 square-feet. Additionally, 22,000 square-feet of office space is under construction, 17,000 square-feet of 4 and 5 star space and 5,000 square-feet of 3 star space, which will be delivered in coming quarters.

Key Takeaways

Overall, York County and Harrisburg East have been very stable. Not much is moving the needle. There is not a lot of absorption nor much new construction that could spur activity.

The real positive news from Q3 2018 is Lancaster County. This submarket rose above the rest for several reasons. First is its 324,000 square-feet in net absorption and 4.9% rent growth (highest since Q3 2003). Additionally the vacancy rate decreased 2.3%. Currently there are 81,840 square-feet under construction and 89,166 square-feet of new construction proposed.

In contrast, the Harrisburg West submarket is showing signs of distress. Its negative 282,000 square-feet of net absorption combined with a modest vacancy rate increase of 1.6% does not offer much hope for a major turnaround anytime soon. Additionally, the submarket has 86,400 square-feet of new office space under construction and 225,596 square-feet of proposed new space that the market will struggle to absorb, further driving down the net absorption.

Based on the activity taking place in Central Pennsylvania’s office real estate submarkets, how do you think this will impact business growth and development throughout these counties? How will this have a ripple effect into other areas of our economy?

Central PA’s submarket clusters for industrial real estate have some of the lowest vacancy rates and highest rental rates we have seen in recent years.

It’s the news that every commercial real estate developer and investor want to hear – the industrial real estate market in Central Pennsylvania ended Q2 2018 with some of the highest rental rates and lowest vacancy rates the market has experienced since 2014.

Now, it hasn’t been a steady climb over the last four years. Rather there’s been quite a bit of volatility in the market, with numbers bouncing up and down and up and down. However, it does appear that the extreme peaks and valleys have evened out and a more stable, yet steadily growing industrial real market has emerged in Central PA – at least for the present moment.

Let’s take a closer look at some of the most interesting trends and numbers reported from CoStar’s Q1 2018 report for Harrisburg/Carlisle, Lancaster and York/Hanover Submarket Clusters.

Harrisburg/Carlisle Submarket Cluster

Vacancy – The industrial vacancy rate for the Harrisburg/Carlisle Submarket Cluster fell significantly from Q1 2018 where it was previously 9.4% to its now 7.9%. This is the largest drop between a single quarter that the market has seen since prior to Q3 2014. In fact, starting with Q2 2017, the industrial vacancy rate for the Harrisburg/Carlisle Submarket Cluster has been quite volatile, swinging up and down by sometimes more than one percentage point in a quarter.

Absorption – The pattern of volatility in the Harrisburg/Carlisle Submarket Cluster continues with its net absorption. Though the market ended 2017 at a positive 2,692,866 square-feet, in Q1 2018 this dropped to a negative (2,132,086) square-feet, mostly due to a single building of 1,100,000 square-feet that was delivered that same quarter. Now in Q2 2018, net absorption is back in the positive at 1,385,445 square-feet with no new buildings delivered this quarter.

Rental Rates – The average quoted asking rental rate for available industrial space is $4.98. This has been steadily increasing ever since it experienced a drop in Q2 2017 where it dropped from $4.61 to $4.46 in one quarter. Now at almost $5.00 per square foot of space, the Harrisburg/Carlisle Submarket Cluster’s rental rates for industrial space is the highest it has been since prior to Q3 2014.

Inventory – As mentioned above, no new buildings were delivered this quarter, or in all of 2018. Three buildings are currently under construction, totaling 2,951,468 square-feet of new space. It’s estimated that these properties will not be delivered until early 2019.

Lancaster Submarket Cluster

Vacancy – The vacancy rate for the Lancaster Submarket Cluster in Q2 2018 held steady at 1.9%, the same as it was in Q1 2018. In fact, it has changed minimally from the 2.0% that Q4 2017 ended with. Previous to these last three quarters, there has been a lot more change from quarter to quarter in the Lancaster Submarket Cluster’s vacancy rate. To be this low, and this consistent for three quarters indicates a stable market with supply and demand near evenly matched.

Absorption – As for net absorption, Q2 2018 ended with a positive 2,723 square-feet. This is a drop of 127,888 square feet from Q1’s net absorption of 130,611 square-feet. After experiencing two quarters of negative net absorption in Q2 and Q3 2017, and rebounding to positive 354,056 square-feet in Q4, this is now the third quarter that net absorption has continued to drop, though still a positive number – for now.

Rental Rates – The quoted asking rental rate for available industrial space in the Lancaster Submarket Cluster took a hit this quarter when it dropped from $4.74 to $4.57 per square foot. The trend in rental rates have been up and down and up and down over the course of the last four years. While it peaked at $5.15 per square foot in Q4 2016, it has never been able to return to that high and is now trending downward, inching closer to the numbers we saw in early 2015.

Inventory – One new building was delivered this quarter, adding 35,768 square-feet of new space to the industrial market. There are no other buildings currently under construction in the Lancaster Submarket Cluster.

York/Hanover Submarket Cluster

Vacancy – The industrial vacancy rate for the York/Hanover Submarket Cluster dipped ever so slightly this quarter from 4.4% in Q1 2018 to its current 4.3%. This is the lowest vacancy has been in over a year when it was also 4.3% in Q1 2017. From that point, the vacancy rate was on the rise, peaking at 5.0% in Q4 2017, then dropping 0.6% points to 4.4% in Q1 2018.

Absorption – Q2 2018 ended with a net absorption of 125,766 square-feet. Looking at Q1’s net absorption of 396,112 square-feet, this is a drop of 270,345 square-feet in a single quarter. Between these two quarters only one new building of 30,000 square feet was delivered to the market.

Rental Rates – The Lancaster Submarket Cluster ended Q2 2018 with a quoted asking rental rate of $4.28. This is $0.14 higher than it was in Q1 and $0.22 higher than in Q4 2017. In fact, this is the highest rental rate this submarket cluster has seen since prior to Q3 2014 with it near steadily rising during that entire period.

Inventory – Only one new building was delivered in Q2 2018 and that added 30,000 square-feet of industrial space to the market. There are currently no new buildings under construction at this time.

Key Takeaways

Given all the activity taking place in the various Central PA submarket clusters, there are particular insights that are important to note. First, we can expect vacancies to remain at record lows for the remainder of 2018, despite a further uptick in new construction. Additionally, E-commerce sales grew 15.2% in Q2 2018, compared with the same time last year and now represent 9% of total sales. E-commerce will continue to be a driving force in the foreseeable future.

While indicators point to strong demand, there are headwinds increasing from labor shortages and tariffs. With the economy at or near full employment, site selection decisions and supply chain nodes may be driven out to secondary and tertiary markets. Finally, it is too early to predict the exact impact of tariffs on the industrial market, but we can look for potential declines in import and export levels.

Looking at the comparison of the three Central Pennsylvania submarket clusters, which do you feel has the strongest industrial real estate market right now? What changes do you anticipate taking place throughout the rest of 2018?

For Central Pennsylvania’s retail real estate market, things are off to a, well, interesting start. The market has seen its fair share of ups and downs in recent quarters, and 2018 is no exception. On one hand, major retailers continue to shutter brick and mortar locations across the Susquehanna Valley. At the same time, other retailers are making the move into new locations. It can be hard to grasp what’s really going on in the market. Does the good outweigh the bad? What will the next quarter bring? The next year? For the answers, we turn to an expert.

Senior Market Analyst with CoStar Group, Chris LeBarton covers commercial real estate data in markets stretching from Western Maryland, including the Baltimore metro area, up through Central Pennsylvania for CoStar’s Market Analytics platform. His insight and expertise are helpful for understanding not only where the market currently stands, but how it’s likely to move in the future.

Chris joins Mike Kushner of Omni Realty Group for a Q&A series where we specifically look at the current state of Central Pennsylvania’s retail real estate market – as well as trends and challenges that stand to reshape things in 2018 and beyond. Here’s how Chris answers our most pressing questions.

Omni: With a net absorption of almost 95,000 SF, the Harrisburg East Retail submarket had a great bounce back quarter in Q1 2018 after four consecutive featuring net move outs. Can you elaborate on the various factors contributing to this?

Chris LeBarton: Retail leasing on the east side of Harrisburg has been fairly whippy this cycle, and certainly since 2015. So, putting too much stock into it is unwise. Minus Hobby Lobby’s move into almost 70,000 SF at Colonial Commons, this looks like less of a win. With that said, there are some strong pockets of buying power (median household income x households) in this submarket, including parts surrounding Colonial Park. In fact, Dauphin County has been one of the faster-growing counties in Pennsylvania since 2010.

Omni: What were the largest lease deals that took place in Central PA’s (Harrisburg East and Harrisburg West) retail real estate market in Q1 2018?

Chris LeBarton: Hobby Lobby’s move-in was the standout for sure, but there were a couple other sizable deals in the region. There was 15,000 SF leased in Carlisle on Newville Road and Ideal Auto Body absorbed 11,000 SF in Hanover. Also, Generations of Furniture signed a three-year deal on roughly 8,100 SF in Lancaster.

Omni: Amidst recent, massive retail closings, how would you say Central PA has responded/rebounded? What factors contribute to your assessment?

Chris LeBarton: Few areas are immune to the wave of big-box retail closings; stores like Kmart, Sears, Boscov’s, Macy’s and Toys R Us were once ubiquitous across the country. But a review of the biggest names shows fairly limited exposure in Central PA. Simply based on population density, natural tourism corridors, and buying power, this region isn’t swimming in malls and power centers. A review of a dozen or so metro areas inside Central Pennsylvania shows that, overall, vacancies are largely where they were coming out of the crash and in some cases improved.

In addition, several retailers that did not have a presence in Central Pennsylvania have absorbed space vacated by some of the big box closings. Stein Mart, Home Goods, and Hobby Lobby moved into the former Kmart on the Carlisle Pike. In Lower Paxton Township, Hobby Lobby opened in the former Giant Foods location and Giant moved across the road to the space vacated by Gander Mountain. At the Capital City Mall, Field and Stream moved into the former Toys R Us location. Overall, Central PA should feel encouraged that the region was no by means hit the hardest, compared to others. In fact, some significant regrowth has occurred as a result of many of these retail closings.

Omni: In your opinion, what are some of the future trends you expect to see in the Central PA retail real estate market?

Chris LeBarton: Mixed-use projects offering at least live-play (work there, or nearby, is an added bonus) with smart ground floor retail are all the rage. If areas outside of the major urban centers want to grow their population, they need to think about approving these types of projects. Naturally occurring affordable housing is becoming a big draw for those who want a nice place to live, but don’t want the high price tag. Developers who are trying to overcome the challenges of rising land and labor costs are looking more and more at secondary and tertiary markets, and there’s no reason Harrisburg can’t accommodate small-to-midsized projects with local/authentic retailers.

Another trend on the rise is related to the last piece of the “last mile” industrial craze and e-commerce. Central Pennsylvania is booming with warehouse and distribution construction; as a result, the biggest population centers in the region may see retailers testing new concepts here. Amazon Key, a home delivery service, opened in close to 40 cities last fall, and Walmart is doing all it can to keep up with the biggest player in the space. It would be reasonable to think that such trends could make their way to the Central PA retail real estate market as well.

While technology and the shift in the way consumers prefer to shop and purchase goods has had a significant impact retail real estate, we can expect the market to react and adapt – just like any industry must to stay afloat. The key to survival is for retailers to stay in front of emerging trends, keep an eye on competitors, and be willing to evolve.

How do you feel Central PA is responding to the changes and challenges taking place in the local retail real estate market? Are you more hopeful or more concerned? Share your thoughts by leaving a comment below!

Central PA’s industrial real estate market is unique for a variety of different reasons. Taking into consideration its geographic, demographic and economic factors, we’ve compiled a list of what we feel are the most important facts worth knowing about our local industrial market.

If you are a commercial real estate investor, or simply someone who wants to know more about Central Pennsylvania’s commercial real estate market, you are sure to find this list of top 10 facts both valuable and interesting. Let’s take a look!

Harrisburg-York-Lebanon CSA is 3rd most populous in PA and 43rd most populous in U.S.

The Harrisburg-York-Lebanon Combined Statistical Area (CSA) is made up of six counties and includes four metropolitan areas in Central Pennsylvania. In 2010, the CSA’s population was 1,233,708 people, making it the 3rd most populous CSA in PA and the 43rd most populous CSA in the U.S. The Harrisburg-York-Lebanon CSA includes the following Metropolitan Statistical Areas (MSAs): Harrisburg-Carlisle, Lebanon, Gettysburg and York-Hanover.

Harrisburg area puts up strong competition against Lehigh Valley.

Though Lehigh Valley is commonly recognized as Pennsylvania’s leader in warehousing and distribution, Harrisburg delivered only 600,000 SF less than Allentown in 2017, while also generating roughly the same rent growth. Additionally, companies such as Whirlpool, Amazon, Ace Hardware, FedEx, Kohler, and Lindt Chocolates have set up large-scale warehouse and distribution centers in Harrisburg – and those tenants account for just a portion of more than 16 million SF of net absorption.

Harrisburg-Carlisle and Lancaster Ranked Among Leaders in National Job Growth

Of the 25 metro areas with the fastest job growth, as of August 2017, both Harrisburg-Carlisle and Lancaster placed on this competitive list. Lancaster ranked number 24 for its steady growth as it diversifies its economy and renovates its downtown and industrial areas. In six months Lancaster added 3,100 new jobs, bringing its total employment to 252,400 and 2017 growth rate to 1.23%. Harrisburg-Carlisle ranked number 8 on the list with 6,200 new jobs added in the first two quarters of 2017, bringing total employment to 346,100 and 2017 growth rate to 1.82%. Noted was the area’s diverse group of healthcare, technology and biotechnology businesses.

Prime location for warehousing and distribution.

Central Pennsylvania is a premiere market for industrial space for several compelling reasons. For businesses who need easy and affordability storing and shipping of products, the areas offers a great roadway system, an abundant work force, relatively inexpensive and available raw land, and the ability to reach 70 to 80 percent of the U.S. population in 24 hours. Additionally, our government regulations on warehousing and distribution are comparatively easy and straightforward compared to other nearby states or regions.

Four of the 10 Select Top Industrial Leases in Q4 2017 took place in the Harrisburg market.

According to CoStar’s Q4 report for 2017, Harrisburg east and west markets represented the majority of top industrial leases signed that year. Prologis Carlisle (1,029,600 SF), Goodman Logistics Center Carlisle (1,007,868 SF), Prologis Harrisburg (623,143 SF) and Carlisle Distribution Center (575,000 SF) were all leased to different businesses who were looking to grow their industrial real estate space in Central Pennsylvania. This activity indicates economic growth and interest in Central PA’s industrial real estate market, both from businesses and real estate investors.

Lancaster market has the highest quoted rental rate for industrial space in Central PA at $4.69 per SF.

Even though Lancaster’s quoted rental rate for industrial space decreased by $0.45 per SF than where it was at the end of Q4 2016, it still comes in higher than Central PA’s other surrounding submarkets. At $4.69 per SF, Lancaster is $1.41 per SF higher than Lebanon, $0.03 per SF higher than Harrisburg/Carlisle, $0.08 per SF higher than Gettysburg and $0.67 per SF higher than York/Hanover based on Q4 2017.

Lancaster also has the lowest vacancy rate for industrial space in Central PA at just 2.0%.

Lancaster ended Q4 2017 with the lowest vacancy rate of all surrounding submarkets. Compared to Lancaster’s vacancy rate of 2.0%, Lebanon came in at 15.8%, Harrisburg/Carlisle at 6.8% and York/Hanover at 4.9% based on Q4 2017. Though Gettysburg did end 2017 with a vacancy rate of 0.4%, it’s important to note this submarket has just 78 buildings with a combined 4,372,179 SF of existing inventory which places it at a much different level than the other submarkets, comparatively.

Within the MSA, Harrisburg/Carlisle has the largest SF of industrial space under construction at 1,813,468 SF.

Two significantly large industrial projects will soon result in the addition of 1,813,468 SF to the Harrisburg/Carlisle submarket. Comparatively, Lebanon has three buildings under construction with a combined 1,310,195 SF of space, Lancaster has two buildings under construction with a combined 76,486 SF of space, York/Hanover has two buildings under construction with a combined 895,000 SF of space and Gettysburg has no new industrial space under construction. For Central PA as a whole, that equals 4,095,149 SF of new industrial space that will soon be delivered to the market.

According to CoStar’s Q4 2017 industrial market report, Harrisburg/Carlisle ended the year with the highest, positive net absorption we’ve seen since prior to 2014. At 2,700,180 SF, this is significantly higher than any other quarter that year, especially Q2 where the net absorption dropped to negative 499,576 SF. Additionally is Q4 2017, one new building was delivered to the market, adding 1,100,000 SF of space. Even with this influx of inventory, the net absorption rose by 2,083,756 SF. The new building that was delivered is Whirlpool’s new distribution facility located at 100 Fry Drive, Mechanicsburg.

Influx of State and Federal dollars will continue to improve transportation in and around Central PA.

The Trump administration has recently been touting a $1.5 trillion, 10-year public-private plan to improve roads, bridges, ports and other infrastructures across the nation. Central Pennsylvania has plans to utilize some of this federal funding to bolster its priority projects which include fixing structurally deficient bridges and widening interstates. Improvement to our roadways and infrastructure will improve public safety, create construction jobs and make Central PA an even more attractive location for warehousing and distribution.

After reading through these top 10 facts any commercial real estate investor should know about Central PA’s industrial market, you are likely to have some comments or questions of your own.

Continuing with part II from our series on the health and future of the U.S. economy, we again welcome the knowledge and insight of Robert Calhoun. Robert is the Northeast Regional Economist for CoStar Group where he manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Let’s now dive into what real estate market participants should be keeping a watchful eye on in 2018 – Be sure to also take a look back at part I from this series which focuses on the U.S. economy as a whole!

Omni: Debt drives real estate markets and there’s a flood of capital in the market right now. Is this a shoe waiting to drop?

I say that all the time: debt drives real estate markets. What you worry about from a capital markets standpoint is that a flood of capital leads to declining underwriting standards, and so far we aren’t seeing anything overly alarming on that front.

There has been some gradual loosening of underwriting standards in the CMBS space, but this has generally been met with demands of higher credit support by the rating agencies. Investors are still doing a good job of differentiating collateral and demanding higher yields for riskier deals. We are seeing a resurgence of CRE CLOs during this cycle, but the structure of these deals are much better than the previous cycle (simpler and easier to understand, more capital in the deals, etc.).

Omni: What is contributing to the widening gap between bid and ask prices in the commercial real estate market right now?

We’ve been watching the staring contest between buyers with dry powder and owners with big gains for some time. While many owners would probably like to take advantage of current valuations and harvest gains at low cap rates, they run the risk of having to redeploy that capital back out into the same market.

Many buyers, despite being flush with cash, are balking at current prices. And the deeper we get into this cycle, the harder it is to make deals pencil by assuming higher rents and higher occupancy into an uncertain future. I would say the widening of bid/ask spreads right now is a healthy thing, further evidence that market participants are staying somewhat disciplined.

A CRE investor has a couple of different dials he can toggle when making investment decisions: risk profile, return requirement, pace of investment. They are choosing to slow their investment pace instead of loosen their risk profile or lower their return requirements.

Omni: From a commercial real estate perspective, what are the most dramatic potential effects that we should brace ourselves for? In terms of the commercial real estate market, what will you be keeping a close eye on in 2018? What will be driving the volatility in 2018?

I’ll echo my comments from before: CRE fundamentals appear solid with no glaring red flags at the national level. The biggest risk to the commercial real estate market would be a sharp rise in interest rates, likely driven by an unforeseen pickup in inflation that causes the Fed to worry that it’s behind the curve. So far, inflation has been very well behaved.

I’ll be keeping a close eye on the unemployment rate and corresponding wage growth. At this stage in the cycle, with labor markets relatively tight, we’ve typically seen wage pressures materialize. As of the Fed’s most recent statement of economic projections, the Committee expects the unemployment rate to be 4.1% at the end of 2018. We are already at 4.1% as of October 2017. If the unemployment rate were to dip below 4.0% and inflation were to begin moving more quickly back toward the Fed’s 2.0% target, that could elicit a faster pace of rate hikes than is currently expected.

Omni: Do you think market participants are factoring the threat from technology into their investment decisions?

Technology is an interesting topic when it comes to commercial real estate. I think many market participants see CRE as an area of the economy that won’t be as easily “disrupted” by technology, but we’re already experiencing disruption! So much ink has been spilled over the Amazon effect on retail that I don’t need to say much here. WeWork and its $20B valuation, whatever you may think of it, is shaking up the office market. Even if a company doesn’t actually use WeWork space when they want to expand, couldn’t they take a page from their playbook and demand a shorter/more flexible lease in a traditional office building? How would that impact office valuations?

Technology like driverless cars won’t change people’s need to live SOMEWHERE, but it might change the shape of cities and neighborhoods, creating winners and losers. Technology is also changing the way investors think about real estate as an asset class. Priceline is currently valued at $84B while Marriott has a market cap of $46B. In that light, which his more valuable: owning the real estate or owning the customer relationship?

I’m hearing more chatter about how artificial intelligence and machine learning can begin to disrupt the CRE lending market, with algorithms taking the place of human underwriters. It’s easy to envision a company like Zillow disintermediating traditional real estate brokers by facilitating peer-to-peer home sales, and that same model could be extended into the commercial real estate market.

To answer your question (finally), I think it’s important for market participants to consider technological threats…but at the same time, nobody does a very good job of predicting an uncertain future! Picking winners and losers will be as challenging as always.

What appears to be most promising for 2018’s commercial real estate market? What is most concerning? Start a conversation by leaving a comment below!

In case you missed it, be sure to check out part I from our interview series with Robert Calhoun. In our first article, Robert shares insights into the health and future of the United States’ economy as a whole.

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

With the GOP’s proposed tax bill on its way to conference committee to reconcile the House and Senate versions, Omni Realty Group chatted with CoStar’s Regional Economist for the northeast, Robert Calhoun, about the state of the U.S. economy.

For more than a decade, Robert has been an influential source of economic analysis as it relates to monetary policy and real estate markets. He manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Through this two part series, Robert shares a wealth of knowledge and insight in his answers to our questions. Let’s take a look at what we can learn about the current state of our economy and the largest threats and opportunities we might encounter in 2018 – Be sure to stay tuned for part II from this series as we diver deeper into commercial real estate and the economy!

Omni: From your perspective, how has 2017 fared? Is the U.S. economy where you thought it would be?

2017 has been another solid year in this recovery. Through three quarters of 2017, real GDP growth has averaged about 2.2% year-over-year, roughly in line with the average since 2010. We are on pace to add another ~2mm jobs this year, and while the rate of job growth has slowed, it’s impressive that we’re still adding this number of jobs in the 8th year of a recovery.

The unemployment rate is down to 4.1% as of October 2017, not only a new low for this cycle but the lowest level since 2000. I expected roughly average growth in 2017, as well as a gradual slowdown in job creation, but I didn’t expect the unemployment rate to fall as much as it has. This took the Fed by surprise as well.

At the end of 2016, the Committee projected the unemployment rate to reach 4.5% by the end of 2017, and I think I was also in that camp. The Fed expected to hike the Fed Funds rate 3 times in 2017, and they are on pace to do exactly that. This is notable: 2017 is the first year in this recovery where the Fed was able to hit their goals for the path of the Fed Funds rate.

Omni: What are your thoughts on Jerome Powell [President Donald Trump’s pick to be the 16th chairman of the Federal Reserve]?

In my opinion, what you get with Powell is monetary policy continuity, which is going to be important for a few reasons. 2018 has the potential to be a challenging year, so there is no reason to amplify that by bringing in a new Chair with radically different ideas about how policy should be implemented.

The Fed intends to begin slowly winding down its mortgage and treasury holdings starting in late 2017, and the taper is set to intensify throughout 2018. Markets are unsure how smoothly this will go, so sticking to the status quo should help smooth out potential volatility. Also, the voting composition of the FOMC swings decidedly more hawkish next year. Picking Powell, a centrist who is already well known to market participants, reduces uncertainty about how the Fed will act in 2018.

Omni: What’s the single biggest threat to the U.S. economy right now? Do you see an economic recession coming anytime soon?

While it would be easy to forecast a looming recession just because the expansion is 8 years old, I’ll paraphrase the Chair of the Board of Governors of the Federal Reserve, Janet Yellen: expansions don’t die of old age. I’m not seeing any alarming imbalances as we have in certain past cycles, and monetary policy is still remarkably loose given how deep we are into this recovery. The biggest threat is probably an unexpected revival of inflationary pressures, which would cause the Fed to raise rates faster, and would cause a spike in interest rates that would be damaging to the economy.

Omni: Generally speaking, has increased regulation been a good thing?

Any increase or decrease in regulation has the effect of moving us along the spectrum between ease of doing business and increased stability. I think I can state, without causing much of an uproar, that going too far in either direction is a bad thing.

Prior to the financial crisis, we had probably gone too far in deregulating certain parts of the financial system, so the increase in regulation that followed is no surprise. That being said, we’re already seeing several bipartisan efforts to reduce the strain from increases in regulation. The House recently passed a bill that would “clarify and amend the High Volatility Commercial Real Estate bank capital rule.” Also, Senate Banking Committee Chairman Mike Crapo (R-IA) is working with a handful of Democrats on a bill that would soften some parts of Dodd-Frank that are considered particularly hard on smaller regional and community banks. The government’s take on regulation is always a pendulum.

What particular insights did you find most compelling? Do you agree or disagree with Robert’s viewpoints? Start a conversation by leaving a comment below!

Now that we’ve taken a broad look at the health and future of the U.S. economy, stay tuned for part II of our interview series with Robert Calhoun to learn more specifically about how the economic climate and emerging technology stand to reshape the commercial real estate market in 2018 and beyond!

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

If you’ve been paying attention you know that traditional retail space is undergoing a major shift in how and where it’s being used. Many stores have closed their doors and/or have embraced the growth of ecommerce over brick-and-mortar locations.

In Central Pennsylvania, we’re seeing quite a few interesting trends that indicate more change is yet to come. Net absorption plummets further into the negative with just 3 new buildings delivered this quarter. A total of 17 new buildings are under construction which begs the question of how the market will respond when 423,994 square-feet of new space is delivered in the coming months. Though vacancy rate is on the rise, so is the quoted rental rate.

How do these trends tie together and what do they tell us about the future of retail real estate in Central Pennsylvania? Let’s take a closer look.

SELECT TOP UNDER CONSTRUCTION PROPERTIES

Coming in at number five on CoStar’s list of Select Top Under Construction Properties is the Gateway Hanover Shopping Center on Wilson Avenue in Hanover. The 136,193 square-foot Target is expected to be completed in Q3 2017. Number seven on the list is the Crossings at Conestoga Creek in Lancaster. This mixed-use project, anchored by Wegmans, will deliver 90,000 square-feet of unleased retail space in Q4 2018. Coming in at number 14 on the list is the Shoppes on South Queen located at 1701 S. Queen Street in York. The 55,000 square-feet of space, which will be delivered in Q4 2017, is 53% preleased.

SELECT TOP LEASES

Among CoStar’s list of Select Top Leases for Q2, one Central Pennsylvania lease made it to the top 10. Red Rose Commons in Lancaster County leased 43,091 square-feet of retail space to Burlington Coat Factory.

ABSORPTION

Net absorption, which was already in the red from Q1, fell even lower this quarter to negative 268,916 square-feet. This is the greatest square footage of space to be negatively absorbed in any one quarter since Q3 2013. It is also only the fourth time the market has experienced a negative net absorption in four years. Three new retail buildings were delivered this quarter totaling just 43,825 square-feet; however, 17 additional building are under construction with a total of 423,994 square-feet of new space that will be dumped into the market in the coming months.

VACANCY & RENTAL RATES

Vacancy rates raised ever so slightly this quarter, from 4.0% to 4.4%. Even with a negative net absorption and increasing vacancy rates, the quoted rental rate rose in Q2 from $13.10 to $13.58 per square foot. This is a recent record high for vacancy rates that have been almost consistently decreasing since 2013.

What we can learn from the market’s performance in Q2 is that, while retail space nationwide has taken a major blow over the last few years, it’s still in demand. The shift toward ecommerce has changed the landscape of retail real estate, but it has not made it completely irrelevant. New buildings are under construction, retailers are moving into new space and the rising cost per square foot demonstrates the demand exists.

Over the coming months and years, it will be important to watch how retailers strategically place their brick-and-mortar locations and how they rebuild their business model to harness the popularity of ecommerce. The business that will thrive in this new landscape will be ones who embrace change and listen to consumer demand.

What trend in Central Pennsylvania’s retail market do you think will have the largest impact? Share your insight and join in the conversation by leaving a comment below!

Decrease in vacancy and recent record high for rental rates indicate a healthy demand for Central Pennsylvania Office Space.

Central Pennsylvania’s office real estate market should have very few concerns or complaints based upon its performance in Q2 2017. Three new office spaces were delivered this quarter, all of which are 100% preleased. As a result, net absorption continued to rise into the black by more than 50,000 square feet. Vacancy declined as did vacant square footage. Most noteworthy, the quoted rental rate jumped by $0.10 per square foot, making this quarter the highest quoted rental rate the market has seen since prior to Q3 2013!

In addition to these highlights, there is a lot more we can take away from the local office real estate market’s performance this last quarter. Here are the major actions that have taken place in Central Pennsylvania according to CoStar’s Q2 Office Statistics.

SELECT YEAR-TO-DATE DELIVERIES

Three new office spaces entered the market in Q2 2017 and they all made it to CoStar’s Select Top Year-to-Date Deliveries. The largest of the three is at 100 Millport Road in Lancaster. The 93,000 square-feet of B Class office space is 100% prelease. Next on the list for Central PA’s Q2 deliveries is the Goodville Mutual Expansion located in Lancaster. Goodville Mutual Casualty Company added on an additional 20,000 square-feet of Class B office space that is 100% prelease. Last but not least is the 13,000 square-foot Class B office space located at 40 Old Willow Mill Road in Mechanicsburg that is 100% preleased to Penn State Medical Group.

SELECT TOP LEASES

Of the Select Top Leases featured in the Q2 CoStar Office Market Report, just one lease from the Central Pennsylvania submarket made the list, but it did so at number 5. A large healthcare company, Centene leased the office space at 300 Corporate Center Drive, Harrisburg from Cushman & Wakefeld. The total space of the lease is 68,846 square-feet.

ABSORPTION

Net absorption is back on the rise, after taking a hit last quarter. In Q2 it was just 35,817 square-feet; now it is 88,814 square-feet. Though there is a long way to go to reach the recent record high of 421,430 square-feet that we saw in the beginning of 2015, we are at least headed back in the right direction. Considering three new buildings entered the market this month with a combined 126,000 square-feet of space, it’s a good indicator of market demand that net absorption rose.

OVERALL VACANCY & RENTAL RATES (ALL CLASSES)

This quarter, the market experienced a decrease in vacancy from 6.0% last quarter to 5.7% currently. This correlates with the decrease in vacant square-footage, down from last quarter’s 3,273,675 square-feet to 3,080,214 square-feet currently. Most noteworthy, the quoted rental rate has risen significantly, $0.10 per square foot in just one quarter. It now stands at $17.67 per square foot which is higher than it’s been since prior to Q3 2013. With only one building under construction, new space will not be entering the market anytime soon, forcing businesses to continue to use up existing inventory.

CLASS A TRENDS

Specifically looking at class A office space, vacancy is at 8.2% and the quoted rental rate is $20.80 per square-foot. The year-to-date net absorption is 20,217 square-feet, with 60,000 square-feet in year-to-date deliveries and 40,000 square-feet currently under construction.

CLASS B TRENDS

Specifically looking at class B office space, vacancy is at 5.5% and the quoted rental rate is $17.36 per square-foot. The year-to-date net absorption is 235,677 square-feet, with 126,000 square-feet in year-to-date deliveries. No new buildings are currently under construction.

CLASS C TRENDS

Specifically looking at class C office space, vacancy is at 4.7% and the quoted rental rate is $15.79 per square-foot. The year-to-date net absorption is negative 131,263 square-feet. This is a major drop compared to the other classes and the overall net absorption for the Central PA submarket as a whole. There are zero year-to-date deliveries and zero projects under construction for class C space.

What trend from the second quarter did you find most interesting or impactful to Central Pennsylvania’s office market? Share your opinion by leaving a comment!

We’ve watched it on the news, read about it in the papers and have seen it in person. Several large retailers in Central Pennsylvania have made the decision to close their doors, such as Sears, Kmart, and hh gregg, as well as a growing list of other retailers struggling to stay in the black.

The landscape of retail real estate is changing, and with that the market is reacting. While some retailers are looking to move out of brick-and-mortar locations, other mega brands like Amazon are looking to move in. What does this mean for the future of retail real estate, specifically here in Harrisburg, York and Lancaster? Let’s take a look at changes that have taken place and trends that have emerged over the last 12 months.

Harrisburg

The Harrisburg retail market has gained 162,000 square-feet of new space in the last 12 months. However, in this same amount of time, the market was only able to absorb 110,000 square-feet, causing the total net absorption for the quarter to drop to a negative 153,000 square-feet. The 4.2% vacancy rate is an increase from the recent low we saw in Q1 2017, when it dipped down to 3.7%. Though the market has 0.0% rent growth, there has been $82M in sales that is almost double the historical average of $52M. Harrisburg has just 1 under-construction retail property that will be delivered in 2017 and will add 12,000 square-feet of unleased space to the market. Though we have recently seen quite a few closings of retail locations, there remains more than 20 proposed projects for new retail space including general retail, community centers and strip malls.

York

The York retail market has gained 27,000 square-feet of new retail space over the last year, with a 12-month net absorption of 152,000 square-feet. The total net absorption for the current quarter is negative 10,000 square-feet. York’s vacancy rate is a bit higher than Harrisburg’s at 5.7%, but over the past 12 months, it has decreased by 0.6%. The market experienced a very small rent growth of 0.1% and did $19M in sales in 12 months’ time. York County has 4 under-construction retail properties that will be delivered in 2017-2018 and will add 264,217 square-feet of mostly unleased space to the market.

Lancaster

In Lancaster County, 34,000 square-feet of new retail space was delivered to the market in the last 12 months. The 12-month net absorption is 169,000 square-feet and the total net absorption for the current quarter is negative 13,000 square-feet. Lancaster’s vacancy rate is much lower than York and Harrisburg, coming in at 2.4%. In the last 12 months the vacancy rate has decreased by 0.6%, reaching its lowest point back in Q4 2016 when it was 2.3%. Like Harrisburg, Lancaster did not experience a rent growth in the last 12 months, but did do $39M in sales. Lancaster County has 5 under-construction retail properties that will be delivered in 2017-2018 and will add 159,500 square-feet of space to the market, more than half of which is preleased.

Trends & Overview

In the current market, each city has its strengths and weaknesses. Harrisburg has the highest 12-month sales of the three, but the lowest net absorption for the current quarter. Lancaster has the lowest vacancy rate of the three, but has relatively unimpressive new construction projects, sales and rental growth. York has the most new retail space scheduled to be delivered in the next few years, but has the lowest 12-month sales of the three.

All things considered, each market appears to be stable and poised for additional growth. Vacancy rates have remained mostly the same or experienced a decrease, the markets are demonstrating their ability to absorb most of the new space that is being delivered, and there continues to be under-construction projects and plan for new space. These indicators provide us with confidence that real estate investors, developers and retailers continue to see value in doing business in Central Pennsylvania.

Between Harrisburg, York and Lancaster, the area offers some unique benefits including more space and at a lower cost compared to big cities. We are also a main corridor for commuters and travelers going to New York, Philadelphia, Baltimore and Washington, D.C. Simply put, Central Pennsylvania has the right combination of resources and advantages to remain a vibrant location for retail growth.

Do you agree? What Central PA market is having the best year so far? Share your thoughts by commenting below!